asset-backed securities - giddy.org

Dr.

Ian

Gid

dy

New

Yor

k U

nive

rsity

Ass

et-B

acke

d S

ecu

riti

es

NIB

C

5Copyright ©2006 Ian H Giddy

Ass

etA

sset

-- Bac

ked

Sec

uriti

es M

ade

Sim

ple

Bac

ked

Sec

uriti

es M

ade

Sim

ple


Ass

etA

sset

-- Bac

ked

Sec

uriti

es: T

hree

Key

Fea

ture

sB

acke

d S

ecur

ities

: Thr

ee K

ey F

eatu

res

�P

oolin

g of

ass

ets

�D

elin

king

of th

e cr

edit

risk

of th

e co

llate

ral a

sset

poo

l fr

om th

e cr

edit

risk

of th

e or

igin

ator

, usu

ally

thro

ugh

the

tran

sfer

of t

he u

nder

lyin

g as

sets

from

an

orig

inat

or to

a

finite

-live

d, s

tand

alon

e sp

ecia

l pur

pose

veh

icle

(S

PV

)�

Tra

nchi

ngof

liab

ilitie

s th

at a

re b

acke

d by

the

asse

t po

ol. T

hese

liab

ilitie

s ar

e ca

lled

“ass

et-b

acke

d se

curit

ies.

”


The

Fun

dam

enta

l AB

S S

truc

ture

The

Fun

dam

enta

l AB

S S

truc

ture


Ass

etA

sset

-- Bac

ked

Sec

uriti

es:

Bac

ked

Sec

uriti

es:

A B

ig S

egm

ent o

f the

US

Bon

d M

arke

tA

Big

Seg

men

t of t

he U

S B

ond

Mar

ket

So

urc

e: b

on

dm

ark

ets

.co

m, R

ese

arc

h Q

ua

rte

rly


Con

sum

er F

inan

ce D

omin

ates

Con

sum

er F

inan

ce D

omin

ates

So

urc

e: b

on

dm

ark

ets

.co

m, R

ese

arc

h Q

ua

rte

rly


Typ

ical

Cre

dit C

ard

Sec

uriti

zatio

nT

ypic

al C

redi

t Car

d S

ecur

itiza

tion


A G

loba

l Phe

nom

enon

A G

loba

l Phe

nom

enon


The

Eur

opea

n M

arke

tT

he E

urop

ean

Mar

ket

Source: HSBC Market Update on absnet.net


Mor

tgag

e S

ecur

itiza

tion:

Exa

mpl

eM

ortg

age

Sec

uriti

zatio

n: E

xam

ple

So

urc

e: w

ww

.em

ac

-in

ve

sto

rs.c

om

Source: europeansecuritisation.com


Dea

lsD

eals

Source: www.absnet.net


Why

Sec

uriti

zatio

n?W

hy S

ecur

itiza

tion?

�Lo

ans

and

othe

r fin

anci

al c

ontr

acts

�Ill

iqui

d�

Orig

inat

or a

sses

ses

risk,

sub

ject

ive,

per

iodi

c

�H

igh

oper

atin

g co

st�

Lim

ited

inve

stor

s ba

se

�S

ecur

ity�

Liqu

id/tr

adab

le�

Inde

pend

ent t

hird

par

ty e

valu

atio

n

�G

loba

l inv

esto

rs b

ase

and

flexi

ble

stru

ctur

es


Cho

ose

a S

truc

ture

to S

uit t

he T

ype

of A

sset

s to

be

Cho

ose

a S

truc

ture

to S

uit t

he T

ype

of A

sset

s to

be

Sec

uriti

zed

Sec

uriti

zed

�M

ortg

age

Sec

uriti

zatio

n�

Non

-Mor

tgag

e A

BS

�In

tang

ible

s�

Infr

astr

uctu

re a

nd P

roje

ct F

inan

cing


Cas

e S

tudy

: The

Com

pany

Cas

e S

tudy

: The

Com

pany

(Fin

ance

Com

pany

Lim

ited)

(Fin

ance

Com

pany

Lim

ited)

�F

inan

ce c

ompa

ny w

hose

gro

wth

is c

onst

rain

ed�

Has

poo

l of a

utom

obile

rec

eiva

bles

�H

as tr

ack

reco

rd�

Pla

ns to

use

this

as

an o

ngoi

ng s

ourc

e of

fina

ncin

g


Sec

urit

ize

the

asse

ts

Fo

rm o

f tra

nsf

er

of a

sset

Fo

rm o

f cre

dit

enh

ance

men

t

Fo

rm o

ftr

an

sfor

ma

tion

of

cash

flo

ws

Fo

rm o

f ca

sh fl

ow

allo

catio

n

Dec

isio

ns

Fo

rm o

f sp

ecia

lp

urp

ose

veh

icle

Key

Dec

isio

nsK

ey D

ecis

ions


Ass

etA

sset

-- Bac

ked

Sec

uriti

es:

Bac

ked

Sec

uriti

es:

The

Typ

ical

Str

uctu

reT

he T

ypic

al S

truc

ture F

OR

D (

SP

ON

SO

R)

SP

EC

IAL

PU

RP

OS

EV

EH

ICL

E

LOA

NS

.

ISS

UE

SA

SS

ET

-BA

CK

ED

CE

RT

IFIC

AT

ES

SA

LE

OR

AS

SIG

NM

EN

T

LOA

NS

.

Ser

vici

ng

Ag

reem

ent


DB

(O

rigin

ator

) SP

EC

IAL

PU

RP

OS

EV

EH

ICL

E

RE

FE

RE

NC

EP

OO

L O

F L

OA

NS

(Sta

y on

bala

nce

shee

t)

ISS

UE

SA

SS

ET

-BA

CK

ED

CE

RT

IFIC

AT

ES

CR

ED

IT S

WA

PA

GR

EE

ME

NT

TO

P Q

UA

LIT

YIN

VE

ST

ME

NT

S

Ass

etA

sset

-- Bac

ked

Sec

uriti

es:

Bac

ked

Sec

uriti

es:

The

Typ

ical

Str

uctu

reT

he T

ypic

al S

truc

ture


Fin

an

ce C

o. L

td(S

elle

r)F

CL

19

97-A

(Sp

ecia

l Pu

rpos

e C

o.)

Inve

stor

s

Fin

an

cia

l Gu

ara

nte

eP

rovi

der

(if r

equ

ired

)

Ser

vici

ng A

gree

me

nt

Pro

ceed

s

Sa

le o

f Ass

ets

Pro

ceed

s

Ass

et-B

acke

dS

ecur

ities

Gua

rant

eeA

gree

me

nt

Ra

ting

Age

ncy

To

p R

atin

g

Tru

ste

eT

rust

Agr

eem

ent

Fin

an

ce C

o.’s

Cu

stom

ers

Hire

-Pur

chas

eA

gree

me

nt

Cre

dit E

nhan

cem

ent:

Gua

rant

ee M

etho

dC

redi

t Enh

ance

men

t: G

uara

ntee

Met

hod


Insu

rer

Pro

tect

ion

Insu

rer

Pro

tect

ion

�F

rom

an

MB

IA r

epor

t:“M

BIA

has

app

roxi

mat

ely

$2.5

bill

ion

of n

et p

ar e

xpos

ure

to th

e m

anuf

actu

red

hous

ing

sect

or, i

nclu

ding

$58

8 m

illio

n of

G

reen

tree

/Con

seco

tran

sact

ions

. Alth

ough

loss

es w

ithin

mos

t of t

he

Gre

entr

ee/C

onse

cotr

ansa

ctio

ns h

ave

exce

eded

exp

ecta

tions

, MB

IA

does

not

exp

ect t

o in

cur

any

insu

red

loss

es b

ecau

se th

e hi

gh

orig

inal

Trip

le-A

and

Dou

ble-

A a

ttach

men

t poi

nts

have

pro

vide

d a

subs

tant

ial a

mou

nt o

f firs

t los

s pr

otec

tion

in fr

ont o

f MB

IA.”


Fin

an

ce C

o. L

td(S

elle

r)F

CL

19

97-A

(Sp

ecia

l Pu

rpos

e C

o.)

Sen

ior

Pro

ceed

s

Sa

le o

f Ass

ets

Rat

ing

Ag

ency

To

p R

atin

g

Cre

dit E

nhan

cem

ent:

Cre

dit E

nhan

cem

ent:

An

Alte

rnat

ive

App

roac

hA

n A

ltern

ativ

e A

ppro

ach

Su

bord

inat

ed

Mo

re S

ubo

rdin

ated

Low

er R

atin

g

No

Rat

ing

Fin

an

cia

l Gu

ara

nte

eP

rovi

der

(if r

equ

ired

)G

uara

ntee

Agr

eem

ent

31Copyright ©2006 Ian H GiddyAth

erto

n C

apita

l(S

elle

r)A

ther

ton

FLF

19

98

-A(S

pec

ial P

urp

ose

Co.

)In

vest

ors

Ser

vici

ng A

gree

me

nt

Pro

ceed

s

Sa

le o

f Ass

ets

Pro

ceed

s

Ass

et-B

acke

dS

ecur

ities

Mel

lon

Mor

tga

ge(S

ervi

cer)

Fra

nch

isee

s(B

orro

wer

s)

Loan

Agr

eem

ent

Exa

mpl

e:E

xam

ple:

Fra

nchi

se L

oan

Sec

uriti

zatio

nF

ranc

hise

Loa

n S

ecur

itiza

tion

Ser

vici

ng A

dvi

sor

Loan

Pa

yme

nts

Cla

ssR

atin

gS

ub

ord

inat

ion

A1,

A2,

A-x

AA

A28

%B

AA

22%

CA

16.5

%D

BB

B12

%E

BB

8.5%

FB

5.5%

Issu

er b

alan

ceN

R0%


Oth

er F

orm

s of

Cre

dit S

uppo

rt?

Oth

er F

orm

s of

Cre

dit S

uppo

rt?

Source: moodys.com


Ass

etA

sset

-- Bac

ked

Sec

uriti

es:

Bac

ked

Sec

uriti

es:

Lega

l and

Reg

ulat

ory

Asp

ects

Lega

l and

Reg

ulat

ory

Asp

ects

�Le

gal

�T

he T

rans

fer

�T

he S

peci

al-P

urpo

se V

ehic

le

�T

axat

ion

�A

ccou

ntin

g T

reat

men

t�

Ban

k R

egul

ator

y T

reat

men

t


�G

oal:

Cre

dit q

ualit

y m

ust b

e so

lely

bas

ed o

n th

e qu

ality

of t

he a

sset

s an

d th

e cr

edit

enha

ncem

ent

back

ing

the

oblig

atio

n, w

ithou

t any

reg

ard

to th

e or

igin

ator

's o

wn

cred

itwor

thin

ess

�O

ther

wis

e, q

ualit

y of

the

AB

S is

sue

wou

ld b

e de

pend

ent o

n th

e or

igin

ator

's c

redi

t, an

d th

e w

hole

ra

tiona

le o

f the

ass

et-b

acke

d se

curit

y w

ould

be

unde

rmin

ed.

LEG

ALA

sset

Ass

et-- B

acke

d S

ecur

ities

: B

acke

d S

ecur

ities

: Le

gal A

spec

tsLe

gal A

spec

ts


�T

he tr

ansf

er m

ust b

e a

true

sal

e, o

r its

lega

l eq

uiva

lent

. If o

rigin

ator

is o

nly

pled

ging

the

asse

ts to

se

cure

a d

ebt,

this

wou

ld b

e re

gard

ed a

s co

llate

rized

finan

cing

in w

hich

the

orig

inat

or w

ould

sta

y di

rect

ly

inde

bted

to th

e in

vest

or.

�T

he a

sset

s m

ust b

e ow

ned

by a

spe

cial

-pur

pose

co

rpor

atio

n, w

hose

ow

ners

hip

of th

e so

ld a

sset

s is

lik

ely

to s

urvi

ve b

ankr

uptc

y of

the

selle

r.�

The

spe

cial

-pur

pose

veh

icle

that

ow

ns th

e as

sets

m

ust b

e in

depe

nden

t

LEG

ALT

hree

Con

ditio

ns E

nabl

e th

e S

epar

atio

n T

hree

Con

ditio

ns E

nabl

e th

e S

epar

atio

n of

the

Ass

ets

from

the

Orig

inat

orof

the

Ass

ets

from

the

Orig

inat

or


6 B

atte

ry R

oad

6 B

atte

ry R

oad

�S

ecur

itiza

tion

of a

DB

S L

and

prop

erty

�D

BS

Lan

d se

lls 6

BR

to S

PV

, Clo

ver,

fo

r S

$835

m

�C

love

r is

sues

S$8

78m

of d

ebt:

66%

to

publ

ic, 3

4% to

DB

S L

and

�S

enio

r B

onds

: 10

year

, 6%

, plu

s “s

hare

of g

ain

if bu

ildin

g is

sol

d”C

ash

S$4

3m

Bu

ildin

g S

$835

m

Sen

ior

Bo

nd

sS

$550

m

Jun

ior

Bo

nd

sS

$328

m

DB

SLa

nd

Sal

eP

urc

has

e


Tax

atio

n A

spec

tsT

axat

ion

Asp

ects

�If

the

SP

V o

r th

e tr

ansf

er is

sub

ject

to n

orm

al c

orpo

rate

, w

ithho

ldin

g, o

r in

divi

dual

tax

rate

s, in

vest

ors

or

borr

ower

s co

uld

in p

rinci

ple

be s

ubje

ct to

add

ition

al o

r do

uble

taxa

tion

Mus

t avo

id d

oubl

e ta

xatio

n of

�S

elle

r/se

rvic

er�

Tru

st o

r sp

ecia

l-pur

pose

cor

pora

tion

�In

vest

ors

TAX


Tax

atio

n: B

efor

e an

d A

fter

Tax

atio

n: B

efor

e an

d A

fter T

rust

Sel

ler

TA

X

Sel

ler/

Se

rvic

er

Inve

sto

rT

AX

?

TA

X?

TA

X?

TA

X?

SA

LE

TAX


Exa

mpl

e:E

xam

ple:

AA-- B

ES

T (

Fia

t Aut

o Lo

an S

ecur

itiza

tion)

BE

ST

(F

iat A

uto

Loan

Sec

uriti

zatio

n)

Source: Standard and Poors


Exa

mpl

e: F

ord

Cre

dit O

wne

r T

rust

199

9E

xam

ple:

For

d C

redi

t Ow

ner

Tru

st 1

999

-- AA


For

d S

truc

ture

For

d S

truc

ture

Fo

rdF

ord

Mo

tor

Cre

dit

Fo

rd C

red

it A

uto

Rec

. Tw

o L

P

Fo

rd C

red

it A

uto

Ow

ner

Tru

st

Rec

eiva

ble

s

Cla

ss A

-1 t

o A

6

Cla

ss B

Cla

ss C

Cla

ss D

Cla

ss A

-5 a

nd

A-6

Cla

ss D

Sal

e

Sal

e


For

d D

eal

For

d D

eal

�Le

gal a

nd T

ax S

truc

ture

�C

ash

Flo

ws

�E

ffect

ive

Cos

t


For

d S

truc

ture

: Wat

erfa

llF

ord

Str

uctu

re: W

ater

fall


Impl

icat

ions

of W

ater

fall

Upg

rade

sIm

plic

atio

ns o

f Wat

erfa

ll U

pgra

des

�T

he c

apita

l allo

cate

d to

a w

ell-b

alan

ced

AB

S p

ortfo

lio s

houl

d sl

owly

dec

reas

e ov

er ti

me,

whe

reas

the

sam

e ca

nnot

be

said

of

a si

mila

r co

rpor

ate

loan

por

tfolio

.�

Rat

ing

upgr

ades

sho

uld

be th

e no

rm in

the

AB

S w

orld

, and

do

wng

rade

s th

e ex

cept

ion

(cur

rent

ly, t

he s

ituat

ion

is e

xact

ly th

e op

posi

te).

In th

e co

rpor

ate

wor

ld, w

e sh

ould

rat

her

expe

ct

dow

ngra

des

to e

qual

upg

rade

s ov

er lo

ng ti

me

inte

rval

s.�

An

AB

S p

ortfo

lio s

houl

d be

trad

ed m

uch

mor

e ac

tivel

y th

an a

co

rpor

ate

loan

por

tfolio

to ta

ke a

dvan

tage

of i

ts in

here

nt r

atin

g vo

latil

ity.


For

d S

truc

ture

: Wat

erfa

llF

ord

Str

uctu

re: W

ater

fall

Rec

eiva

ble

sC

lass

A-1

to

A6

Cla

ss B Cla

ss C C

lass

D


For

d S

truc

ture

: Def

ault

or L

oss?

For

d S

truc

ture

: Def

ault

or L

oss?

Rec

eiva

ble

sC

lass

A-1

to

A6

Cla

ss B Cla

ss C C

lass

D


Pay

dow

nP

aydo

wn

: Sof

t Bul

let S

truc

ture

: Sof

t Bul

let S

truc

ture


Cos

tC

ost --

Ben

efit

Ana

lysi

s B

enef

it A

naly

sis

�C

orpo

ratio

ns, l

ike

For

d�

Ban

ks

�In

vest

ors


Sep

arat

ion

of T

wo

Bus

ines

ses:

Orig

inat

ion

and

Lend

ing

Sep

arat

ion

of T

wo

Bus

ines

ses:

Orig

inat

ion

and

Lend

ing

SP

ON

SO

RIN

GC

OM

PA

NY

SP

EC

IAL

PU

RP

OS

EV

EH

ICLE

AC

CO

UN

TS

RE

CE

IVA

BLE A

CC

OU

NT

SR

EC

EIV

AB

LE

ISS

UE

SA

SS

ET

-BA

CK

ED

CE

RT

IFIC

AT

ES

SA

LE O

RA

SS

IGN

ME

NT


For

d C

redi

t Aut

o O

wne

r T

rust

F

ord

Cre

dit A

uto

Ow

ner

Tru

st

Siz

e1,

462,

716

$

FO

RD

199

9-A

Und

erw

ritin

g fe

es2,

311,

593

$

0.08

%O

ther

cos

ts1,

000,

000

$

0.03

%To

tal u

pfro

nt c

osts

0.11

%W

AM

3.94

1667

year

sP

ortfo

lio y

ield

9.80

%F

undi

ng c

ost

5.30

%D

efau

lt ra

te1.

50%

Ser

vici

ng fe

e1%

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urc

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bs-

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xls


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the

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Rat

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Mix

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SR

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gs M

ix in

US

D A

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So

urc

e:

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od

ys,

“D

efa

ult

& L

oss

Ra

tes

of

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uc

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d F

ina

nc

e S

ec

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19

93

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Cre

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ate

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ite

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it E

nh

an

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nt.


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ner

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-1 t

o A

6

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Cla

ss C

Cla

ss D


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mpl

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triu

mE

xam

ple:

Atr

ium


Str

ess

Tes

ting

Str

ess

Tes

ting


Wha

t Do

Rat

ings

Tel

l Us

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ut D

efau

lt R

ates

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hat D

o R

atin

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ell U

s A

bout

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ault

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Def

ault

Pro

babi

litie

s an

d R

ecov

ery

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esD

efau

lt P

roba

bilit

ies

and

Rec

over

y R

ates

Source: Moodys

Loss

es a

re a

func

tion

of:

�D

efau

lt ra

te (

over

the

perio

d of

the

inve

stm

ent)

�R

ecov

ery

rate

�Lo

ss r

ate

is P

D(1

-R)


AB

S L

oss

Rat

es A

re L

owA

BS

Los

s R

ates

Are

Low

So

urc

e:

Mo

od

ys,

“D

efa

ult

& L

oss

Ra

tes

of

Str

uc

ture

d F

ina

nc

e S

ec

urit

ies:

19

93

-200

4”


Pro

f. Ia

n G

idd

yN

YU

Ste

rn S

choo

l of B

usin

ess

Tel

+1.

646.

8080

.746

; Fax

212

.995

.423

3

ian.

gidd

y@ny

u.ed

u

Web

: gid

dy.

org

Am

ster

dam

Inst

itute

of F

inan

ce

Tel

+31

20

5200

160;

Fax

+31

20

5200

161

info

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onta

cts

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